Could 2024 be the year emerging markets bounce back?

Emerging markets have underperformed their developed counterparts for around a decade, with the trend continuing in 2023 despite the robust economic growth¹. Emerging market economies are highly diverse region and in many cases, their central banks have been quick to tackle inflation, with several already starting to cut interest rates. This should help to support the local stock indices going forwards.

Investing in emerging markets is never without risk, but government borrowing is typically more modest than in developed markets, making it easier for the public sector to take action if required. Another factor in their favour is the recent fall in the value of the dollar, the currency in which much of their debt is denominated.

Long-term investors who are comfortable with the higher level of volatility found in emerging economies might want to consider increasing their allocation via one of the specialist funds that provide exposure to the area.

Broad investment

One option would be a broad-based offering that invests across the region such as the Fidelity Emerging Markets investment trust. The portfolio is heavily tilted in favour of places like Hong Kong, South Africa, Mexico and Brazil relative to the benchmark, with the main sector preferences being financials and consumer discretionary.

Chris Tennant, the co-portfolio manager, says that they are particularly excited about Latin America. “In addition to Mexico, which benefits from the nascent trend of nearshoring, the macroeconomic environment in Brazil is very strong. Brazil’s trade surplus is at record highs, and with inflation under control and interest rates coming down, we expect a positive tailwind for consumer and corporates over the next year.”

The fund uses a bottom-up approach that is driven by the underlying fundamentals, with the managers focusing on quality, consistency of returns and a reasonable price. In 2023 the trust’s shares rose by 4.9%, compared to the 3.6% achieved by its benchmark². Please remember past performance is not a reliable indicator of future returns.

The single country approach

Another option would be a single country investment trust like Fidelity China Special Situations, which focuses on undervalued companies with good long-term growth prospects that have been underestimated by the market. It has a bias to small and medium-sized stocks, where greater mispricing opportunities are believed to exist.

Manager Dale Nicholls is a highly experienced manager, who is supported by Fidelity's extensive research resource, including a team with boots on the ground in China.

He has built up a strong track record since he took over the trust in April 2014, delivering an NAV total return of 134% during the period. This is well ahead of the 51% gain in the MSCI China benchmark³.

Emerging market funds in the Select 50

Alternatively, Fidelity’s Select 50 list of handpicked funds contains several different ways of investing in Asia/Emerging market equities, with one of the most popular being the widely held Stewart Investors Asia Pacific Leaders Sustainability. We recently looked at it in some detail along with two complementary funds that would fit with it: Fidelity Asian Smaller Companies and Schroder Oriental Income.

Another actively managed selection is Lazard Emerging Markets that has a concentrated portfolio and a historic dividend yield of 3.21% that might appeal to investors who are looking for a combination of income and growth. There is also Comgest Growth Emerging Markets, which takes the same focused approach, but provides exposure to high quality companies across the region.

If you would prefer a passively managed fund there is the iShares Core MSCI EM IMI UCITS ETF that tracks the MSCI Emerging Markets Investable Market index. It offers a broad exposure and has very low ongoing charges of just 0.18%.

View the Select 50

Past performance is not a reliable indicator of future returns

Source: Fidelity International, share price and benchmark performance in GBP terms, 31.12.18 to 31.12.23. 

Source:

¹ Returns in Sterling. Source: Datastream, Numis Research 

² Basis: bid to bid with income reinvested, in GBP, net of fees. Source: RIMES and other third-party providers such as Morningstar. 

³ Source: Winterflood Securities, Morningstar

Important information: The value of investments can go down as well as up and investors may not get back the amount invested. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The use of financial derivative instruments for investment purposes, may expose the Fidelity Emerging Markets and Fidelity China Special Situations funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Investors should note that the views expressed may no longer be current and may have already been acted upon. Shares in investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.